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Recapitalization of state owned banks to continue

The government once again plans to allocate funds for the recapitalization of state-owned banks (SoBs) in the upcoming budget for the next fiscal year (FY 2018-19), according to sources at the Ministry of Finance.

Ministry insiders say the government is likely to allocate Tk2,000 crore of public money to ease the SoBs’ capital deficit, despite this move facing heavy criticism from noted economists in the past.

Finance Minister AMA Muhith might make the declaration in his budget speech on June 7.

Recapitalization is a type of corporate reorganisation involving substantial change to a company’s capital structure, motivated by a number of reasons. Usually a large portion of equity is replaced with debt or vice-versa.

However, in Bangladesh, recapitalization is being termed a “black hole” by the financial sector, as the SoBs were involved in every one of the largest loan scams, and the banks’ defaulted loans stood at 26.52% as of December 2017.

In line with the Basel-III regulatory framework, the capital-adequacy requirement for banks has been increased, but most of the Bangladeshi SoBs fall short of this requirement.

The government has injected a total of Tk13,705 crore as recapitalization fund into the SoBs from fiscal year 2009-10 to fiscal year 2016-17, with an allocation of Tk2,000 crore in the outgoing fiscal year, 2017-18.

The government is likely to allocate Tk2,000 crore more in the next budget, so there might not be any chance of eliminating this allegedly bad economic move.

As of fiscal year 2016-17, among the receiving banks, BASIC Bank got the highest amount of Tk3,390 crore followed by Sonali Bank of Tk3,003 crore.

The state-owned banks have been troubled by a series of loan scams amounting to thousands of crores in taka. The large-scale scams include the Hallmark scam of over Tk3,500 crore from Sonali Bank, and Tk45,00 crore siphoned out from the BASIC Bank 9in between 2009 and 2012 during the tenure of Sheikh Sheikh Abdul Hye Bachchu as the Chairman of the bank’s board of directors.

Is it a bad economic move?

Many economists and experts have strongly criticized the government’s repeated spending of public money to keep the SoBs afloat through recapitalization. They have pointed out that good governance in the banking sector is on the decline and the number of loan defaults is on the rise.

“Wilful loan defaulters and plunderers feel encouraged as more and more public money is injected into troubled banks without holding anyone accountable,” Director General of Bangladesh Institute of Bank Management (BIBM), Dr Toufic Ahmad Choudhury, told the Dhaka Tribune.

He added: “The government provides recapitalization for financially weak banks instead of taking exemplary legal action against those making the banks vulnerable.”

AB Mirza Azizul Islam, a former adviser to the caretaker government, said: “The government could recapitalize the SoBs in the short term, but the banks must become financially solvent. Banks are not supposed to take money from the government; they are supposed to turn a profit.”

“In this regard, increased loan recovery capacity and an end to political influence on loan disbursement are needed to make the banks commercially viable and stable.”

Meanwhile, former Bangladesh Bank governor, Dr Salehuddin Ahmed, commented that the recapitalization of banks is nothing more than draining of public money.

Addressing the matter, he told this correspondent: “I am not in favour of recapitalization. Through this process of injecting money into the SoBs, government liabilities are increasing day by day.”

Dr Salehuddin further criticized the repeated recapitalization process, saying: “It looks like the government is pouring water into a pipeline and bankers are draining it from the taps.”

“There is no accountability of the bankers to make the banks profitable, or make an effort to collect on non-performing loans.”

There are also allegations that the recapitalization mechanism is mostly helping vested interests, especially businessmen backed by the ruling party. These people take out loans from SoBs without proper mortgages and documents, and then become wilful defaulters.